Final Q3 GDP estimate: 2.6%

posted at 8:50 am on December 22, 2010 by Ed Morrissey

The Bureau of Economic Analysis released its final estimate of economic growth in the third quarter, revising it upward for the second time to 2.6% from an original estimate of 2.0% at the end of October. The upward estimate of annualized growth in the third quarter comes mainly from personal consumption and business investment, especially in inventory, not surprising considering the holiday retail season’s approach. Exports also increased, but at a slower rate than in the previous quarter:

Real exports of goods and services increased 6.8 percent in the third quarter, compared with an increase of 9.1 percent in the second. Real imports of goods and services increased 16.8 percent, compared with an increase of 33.5 percent.

Real federal government consumption expenditures and gross investment increased 8.8 percent in the third quarter, compared with an increase of 9.1 percent in the second. National defense increased 8.5 percent, compared with an increase of 7.4 percent. Nondefense increased 9.5 percent, compared with an increase of 12.8 percent. Real state and local government consumption expenditures and gross investment increased 0.7 percent, compared with an increase of 0.6 percent.

The change in real private inventories added 1.61 percentage points to the third-quarter change in real GDP, after adding 0.82 percentage point to the second-quarter change. Private businesses increased inventories $121.4 billion in the third quarter, following increases of $68.8 billion in the second quarter and $44.1 billion in the first.

The inventory addition is a potential problem. Without the expansion of inventory, Q3 GDP would be just under 1%. The impact in Q3 was about twice that in Q2, which means that businesses have anticipated somewhat higher demand. In fact, as the report states, the actual measure of final sales in Q3 is exactly what it was in Q2 — 0.9%, after subtraction of inventory expansion. The same was true in 2009 Q4 and to a lesser extent in 2010 Q1, where the expansion of inventory failed to get matched to any expansion in demand.

What changed between the second and third estimates? The data on inventory showed a greater expansion than first thought, and that was offset somewhat by a lower-than-estimated level of personal consumption. While the overall number went up thanks to added inventory, the actual sales data remained flat from Q2. If people start spending money in the holiday season, then the inventory expansion will be no problem in following quarters. If not, retailers and wholesalers will be forced to heavily discount to move the stock, which will impact bottom lines in the next couple of quarters.

It’s not an awful number, but this isn’t really good news, either. It shows sales maintaining a flat level throughout the middle of the year, and a 2.6% GDP rate is about half of what’s needed for massive expansion of job creation. This economy is simply not igniting.

Update: Market News calls the estimate “disappointing,” and makes the same point I did:

This composition lowered real final sales to just +0.9%, a very modest pace that shows little momentum. Real final sales “surged” to +2.1% in Q4:2009 and then calmed to a pace that has averaged just +1% in the three quarters recorded so far in 2010. Hopefully higher consumer spending for the holidays will bolster consumption in Q4.

Still notable in Q3 was a downturn in residential fixed investment at -27.3%, its worst performance since Q1:2009. This came about after the homebuyer tax credit expired.

One note about pinning hopes to holiday sales: that will be only a temporary bump at best. With sales flat for a year, retailers aren’t going to rush to fill inventory, especially if they have to heavily discount it to move.

You know, if only we taxed people more. Then the government would have more money to spend on the people they took money from, but only after they formed huge bureacracies to determine how to spend it.

Gold firmed in Europe on Wednesday, building on three straight sessions of gains, as the dollar retreated and as warnings from credit rating agencies on some euro zone economies boosted haven demand for the metal.

GROWTH DATA EYED

The financial markets are now awaiting third-quarter growth data from the United States later.

“The release of U.S. Q3 GDP figures later (to)day could well be dollar supportive, if as expected they are revised upwards to 2.8 percent from the previous 2.5 percent,” said CMC Markets analyst Michael Hewson.

“Insanity is doing the same thing over and over again and expecting different results.” ~ Albert Einstein

If you haven’t noticed, the world is full of people who appear normal but by Einstein’s standard are insane. The problem for us is that the majority of them are in the MSM (Reuters included) and the rest are politicians and government “leaders.”

…isn’t good news for consumers who will end up paying more for gas in February. January futures oil futures contracts are closing at around $88 per barrel, up from the December futures contracts so we’ll be paying more in January, as well. I’ve seen estimates that oil could be trading for as much as $120 per barrel in the coming months. Probably a combination of increased demand and a falling dollar.

Euro futures continue to fall against the dollar, so I guess we should be greatfull we’re not over there…

So the food/energy inflation rate is higher than the GDP increase without inventories? Sounds like people might be stockpiling those inventories for when it becomes too expensive to buy more or ship them anywhere.